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Pinpointing rental demand is important in residential property investment, and vacancy rates – the proportion of unlet dwellings – can be a useful measure.

But how much weight should a would-be investor put on this figure when they are deciding where to buy?

Australian Property Buyers director Karin Mackay says while investors should look for where ”there may be a shortage of rental properties”, the overriding factor is price growth.

”Capital growth is key,” Mackay says, noting that this means not just looking at what median prices ”did last year” but how a suburb has performed over the past 10 or 20 years.

Vacancy rates are typically higher in inner than outer suburbs.

Real Estate Institute of Victoria figures broadly show that Melbourne’s outer suburbs (20 kilometres-plus from the CBD, excluding the Mornington Peninsula) had the lowest annual vacancy rate, of 2.1 per cent, in 2013.

By comparison, inner suburbs within four kilometres of the CBD had the highest vacancy rate, at 3.8 per cent, up from 3.4 per cent in 2012.

But Mackay says an inner-city investment should still perform better when it comes to capital growth. ”It will rise far quicker in value,” she says.

Dr Andrew Wilson, senior economist at Fairfax-owned APM, says several factor could influence such results, including increased activity from owner-occupiers, leading to a smaller pool of rental properties.

The strength of the market in middle suburbs, pushing more renters out further in search of more affordable rentals, may also be a factor, Wilson says.

He adds that the outer eastern suburbs also saw solid improvement in median house price growth last year and notes that ”not everybody wants to live in quaint inner suburban cottages or refurbished new properties … some people do want the middle ring-outer ring suburban lifestyle, and maybe that’s part of it.”

Ian James, director of JPP Buyer Advocates, which also has a small property management department, says vacancy rates are playing an increasingly important role when investors are looking at buying units in the inner suburbs.

He says this is due to the large number of apartments now coming on the market within a few kilometres of the central business district. ”With the new amount of stuff coming on, it is damn hard to rent them out,” James says.

Many units in inner city areas such as Richmond or South Yarra will still experience good capital growth in the long term, but renters may be harder to come by. And he says this is particularly relevant with the increasing number of people who are now relying on rental returns for their income.

”[Vacancy rates] play a higher part now I believe because people are actually thinking about different styles and types of property,” James says. And vacancy rates in an area is just one factor to take into account when considering how easy it will be to rent out an investment property.

Barry Plant property franchise development manager Yvonne Martin says factors such as a property’s distinctiveness, location and presentation all play a critical role in determining how attractive a property will be for renters.

Martin says the price range of the property is also an important consideration because properties at the top end of the market will have higher vacancy rates and there are more negotiations on rent than for properties at the lower end of the market.

”The more expensive the property, the more expensive the rental’s going to be and the greater chance that it is sitting vacant for longer,” Martin says.

Sprucing up a property makes financial sense

When Jason Wong and his wife Kim bought their two investment properties, vacancy rates were a consideration but not the deciding factor.

The couple currently own a three-bedroom unit in Burwood East, which they initially lived in, and a three-bedroom house in Boronia.

”At the end of the day, it’s really about long-term investment for us,” says Mr Wong, a development manager at Colonial First State Global Asset Management. ”If the property was vacant for some time, we wouldn’t be too fussed about it but it is important in a longer term sense that we continue to get tenants.”

Mr Wong, who currently lives in Wantirna, says while the couple considered the demand for rental properties in the areas in which they bought, they also spent thousands of dollars sprucing up both places to make them as attractive as possible. This move proved to be particularly successfully with the Burwood East property.

”It was getting a bit tired internally and we were probably struggling a little bit to get tenants,” he says.

”But as soon as we spruced it up, we had people actually upping bids to get in there.”